The Abbott government is trying to strike a last-minute compromise deal with Senate crossbenchers on university fee deregulation by proposing the equivalent of a mining "super profits tax" for universities that increase their fees over current levels.

Education Minister Christopher Pyne.Credit:Kate Geraghty

Under the proposal, originally suggested by leading education economist Bruce Chapman, universities would be allowed to set their own fees but would face a levy if they raise their fees over a set amount.

Universities that increase their fees above current levels would have their commonwealth subsidies reduced by 20 per cent while grants to universities that increase their fees by $10,000 would be reduced by 60 per cent.

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While the government has abandoned other controversial policies such as the GP co-payment, it remains determined to deregulate university fees before the May budget. It has embraced the idea of a fee levy as a potential gamechanger in its efforts to win over a recalcitrant Senate.

A spokesman for Education Minister Christopher Pyne confirmed that Professor Chapman's proposal had been raised in negotiations with Senate crossbenchers.

"A number of proposals, including the submission by HECS architect Bruce Chapman to the Senate committee, are currently being discussed with crossbenchers," the spokesman said.

"As we have previously stated we intend to consult and negotiate to secure passage of the reforms, which inevitably involves listening to and discussing ideas."

Professor Chapman's proposal - developed over several days of talks with officials from the Department of Education - follows growing calls from university vice-chancellors for the government to adopt a more moderate "third way" on fee deregulation.

The government's current proposal is for universities to set their own fees, with the amounts capped at international student levels which are often twice to three times as much as domestic fees.

Adopting Professor Chapman's compromise position would give universities more flexibility over pricing while blunting attacks from Labor and the Greens that fees could soar under a deregulated system. It would also reduce the perception that the elite Group of Eight universities - such as the universities of Sydney and Melbourne - would benefit the most from deregulation while regional and suburban universities would suffer.

In his Senate submission, Professor Chapman estimates that the Group of Eight universities would provide 55 per cent of the government levy while the remaining 32 universities would contribute 45 per cent.

"Without a mechanism such as this, I believe price increases would be very high and that would be an unfair outcome for students," Professor Chapman said.

Professor Chapman, who will appear before a Senate committee this Friday, said his proposal was similar to the Rudd government's mining super profits tax but that the goal was to keep prices low rather than bringing in large amounts of revenue.

The idea was developed in conjunction with leading higher education consultant David Phillips, a former adviser to the Hawke government.

The government needs to win the support of six of the eight crossbenchers to pass higher education reform. Liberal Democratic senator David Leyonhjelm, Family First senator Bob Day, independent senator John Madigan and the Palmer United Party senator Dio Wang are seen as supportive while PUP's Glenn Lazarus and independent Jacqui Lambie are strongly opposed. The government still hopes it can convince independent senator Nick Xenophon and Motoring Enthusiast Party senator Ricky Muir to support an amended package.

Senator Xenophon said: "I am happy to keep talking to the government but I still have significant reservations [about deregulating university fees]. This would still be a significant departure from the current situation and would need to be looked at closely."

In its submission to a Senate inquiry into the government's proposals, RMIT University urges the government to adopt a "more careful" approach to fee deregulation.

"There are genuine concerns that the combination of fee deregulation and income-contingent loans provides an unsustainable funding environment and one that could compound debt beyond reasonable or manageable levels," RMIT's submission says.

The University of Western Sydney says in its submission that "the debate has shifted towards asking what moderated forms of deregulation are possible" and urges the government to explore options to regulate price.